By Bob Almond, CEO, NEST International
Sales tax remittance is complicated and can be particularly difficult to handle in the facilities maintenance management and construction industry. Each state has the authority to determine, or not, the amount of sales tax applied to every service and material purchase, which makes understanding and managing the intricacies of tax law next to impossible without technology. Facilities maintenance professionals in the retail industry do not have time to manage such a complicated process and are looking for solutions that will mitigate risk and reduce the administrative burden.
Not only does sales tax vary from state to state, but sometimes district to district. For example, in the state of Wisconsin, the “Baseball Stadium District Tax” is an extra 0.1% tax that is added to the normal sales tax of 0.5% to any establishment that is conducting business within a certain proximity of a baseball stadium. These “baseball stadium districts” consist of Milwaukee, Ozaukee, Racine, Washington, and Waukesha. This is just one of countless examples that illustrates how easily taxes can be underpaid or miscalculated, due to the intricacies and variances from area to area.
When auditing sales tax, auditors hunt through transactions for three things; that the proper taxes were charged on the services and/or materials, that taxes were collected, and most importantly, that taxes were remitted to the state. Auditors will take a sample period of time to perform their audit. If an error in sales tax remittance is found, their charge to the organization would be multiplied by the span of time that has lapsed as it is their assumption that a sales tax error that occurred in the sample period of time also took place in other time periods. For example, if the retailer pays $100,000 in sales tax, and the auditor found that in a sample period had a 10% error in sales tax remittance, the charge would be $10,000 multiplied by 1-7 years, plus penalties and interest. To investigate and/or protest such findings, the retailer would be faced with costly auditing/legal expenses.
There are two approaches to tax remittance that mitigate the risk of vendor non-payment and both have their advantages and challenges. The first method is to utilize a self assessing model. This approach allows retailers to take control of the sales tax process by taking responsibility for accruing and remitting taxes for materials and services rendered in all states. All tax payments would be withheld from service providers, and remitted directly to each state by way of its monthly sales tax report and remittance for its transactions and its stores for that particular period. Normally, the retailer is already filing a tax return; this would just be an additional tax remitted.
A self assessing company would have a standard letter generated by the proper authority within the organization that would be distributed to service providers stating that the company self assesses, therefore, will not be paying sales tax to the service provider. All of this is possible today because of technology. This approach carries the least amount of risk, and guarantees that all sales tax the organization is responsible for paying is successfully remitted, and there is no reliance on other organizations to properly remit. The downside of this approach is that the administrative burden will be on the company to ensure the sales tax is paid and the proper tax assessment takes place.
The second way to approach sales tax remittance is for the retailer to work with one or a small number of facility maintenance management firms, and place remittance responsibility on those firms. This should never be based on an element of trust and confidence that exists between the management firm and the retailer. Rather, the management firm must provide the retailer with statements of EFT transfer and/or check transactions with consolidated reporting as verification that taxes have been effectively handled for the remittance period so the retailer will have sufficient documentation for auditors to review. Also, if the management firm gets audited, they are the ones who pay any required shortages, and of course, the administrative burden falls on them.
When retailers work directly with local service providers, paying taxes to those service providers and entrusting them to properly remit those taxes creates a great deal of risk. If the providers do not pay as required, the state will look to the retailer for unpaid taxes, even if the retailer has already paid through the service provider. State agencies estimate that 30% of service providers in this industry do not properly pay sales tax and/or not pay them at all! Whether that statistic has validity or not is irrelevant to the fact that the government could hold the retailer responsible during the audit process.
When working with a management firm, there are a number of factors to consider:
- Does the company you are dealing with have the technology required to properly administrate sales tax remittance?
- Is the company you are dealing with financially stable? Will they cover sales tax remittance errors should they occur?
- Does the company you are dealing with have knowledgeable and competent professionals that truly understand the intricacies of sales tax remittance?
When it comes to your maintenance budget, sales tax is the smallest line item, yet it can be financially and administratively crippling. It becomes the elephant in the room if mishandled. Retailers can greatly reduce their risk by adopting a self assessing business model, or taking the time to properly vet the maintenance management firm they choose to work with.
The above article has been written by Bob Almond, CEO of NEST International. The information contained in this article is not of a legal perspective-it is based upon Mr. Almond’s 20 years of experience in the facilities maintenance management industry and in various tax audits and reviews.